Because there is no personal
profit motive for owners or members of nonprofit
organizations and organizations in the public sector,
such as governments, accountability is measured instead
of profitability. The main purpose is stewardship of
financial resources received and expended in compliance
with legal or other requirements. Financial reporting is
directed at the public, fund contributors, or to private
members, who are concerned with adequate fund balances
or net financial assets to provide future programs and
services, rather than
investors, who seek a profit or return on
investment. Funds, which are a self-balancing set of
accounts, may be established to provide reporting of
expenditure for designated purposes depending on the
needs of financial statement users. Fund accounting may
also adopt budgets that are formally recorded in the
accounts of the related fund. Contractual obligations,
commitments or encumbrances may be formally recorded in
some funds.
Fund accounting serves any nonprofit
organization or the public sector. These organizations
have a need for special reporting to financial
statements users that show how money is spent, rather
than how much profit was earned. Profit oriented
businesses only have one set of self-balancing accounts
or general ledger. On the other hand, nonprofits can
have more than one general ledger depending on their
needs. A business manager in charge of such an entity
must be able to produce reports that can detail
expenditures and revenues for multiple funds, and
reports that summarize the financial activities of the
entire entity across all funds. For example, if a school
system receives a grant from the state to support a new
special education initiative, and receives federal funds
to support a school lunch program, and even receives an
annuity to award to teachers for research projects - at
any given time, the school system must be able to
extract the financial activities attributed to these
programs and report on them.
Given that funds are essentially having more than one
general ledger, the accounts can be designed by the
special use of account numbers, each set of numbers
therein represent a specific fund. Alternatively, they
can be designed by using certain recording and reporting
capabilities and features of the accounting software
being used. For this reason, many nonprofit
organizations and the public sector will often use
off-the-shelf or custom-designed accounting software
that is flexible enough to accommodate the needs of
special reporting.
The use of fund accounting has often been a topic of
debate in the accounting profession who question its
usefulness, particularly in the standard-setting
process. However, it is the unique nature in which
nonprofit organizations and the public sector operate
that has made fund accounting a useful system for
financial reporting to meet the needs of financial
statement users. To that end, the accounting profession
has recognized this need and continues to support the
use of fund accounting by providing extensive standards
and principles in this area.